Online Advertising Lets P2P Go Legit

LTDnetwork and EMI are offering a new P2P music distribution method that relies on online advertising for financial support.

EMI Music announced Wednesday that it has agreed to offer its entire music catalog through LTDnetwork's Qtrax service. Qtrax is one of the first free music download platforms to emerge based on a legal peer-to-peer (P2P) distribution model.

LTDnetwork, an e-commerce software developer, has been developing its ad-supported service since 2002. Qtrax will begin testing later this year and will pilot initially in the United States.

"Qtrax allows legitimate P2P downloads and so far EMI has encouraged this as a new business model for the music industry," said Allan Klepsisz, chief executive officer of LTDnetwork. "They've been making design contributions to the service based on what they think will work best for the record labels."

In addition to EMI, LTDnetwork intends to engage other big names in the music game, specifically Sony BMG, Warner Music Group, and Vivendi. The company has already signed with a number of independent labels as well.

"We think Qtrax is pursuing an important new business model that seeks to solve a couple of problems, including how record companies are compensated for P2P file sharing," said Ken Parks, senior vice president of strategy and business development at EMI. "We think of it as a step toward capturing some of the billions of dollars in advertising floating online. Advertisers are very interested in associating themselves with music."

The Qtrax service offers two tiers: free and premium. The free tier lets users sample and search the network for "registered" music files. Registered files are tracks that have been encrypted to the .mpq format. The files are converted to the .mpq format on the fly; once downloaded, they will only play on Windows Media Player

"When someone goes to [our] P2P network to download a file, we encode the file to .mpq format, which means that although the track resides on your PC, you need a code to access it," Klepsisz said. "So every time you play a song we know you've played it. We keep track of song plays for royalty reporting  we pay the record companies based on the number of plays a song gets, rather than based on a random statistic."

Once a track has been downloaded, users are permitted to listen to it five times for free. Each time a user listens to a track, the service also offers up various click-to-buy options and encourages premium upgrades, which eliminate ads.

Users can opt to subscribe to a paid version of the service that offers carte blanche access to all music on the Qtrax network, utilizing Microsoft's Janus DRM technology. It also allows for transfer of songs to PlaysForSure-enabled portable devices for as long as the user's subscription remains active.

"We're not interested in who plays what, what we're interested in doing is knowing how many times a song is played," Klepsisz said. "We don't even ask for people to give us their names, a nickname is more than enough for us."

Qtrax is also taking a novel approach with its incentive program. It doles out "points" that music fans can trade for additional plays on tracks downloaded from the free tier or for discounts on subscriptions or a-la-carte purchases.

The P2P model generates revenue for EMI by way of Internet advertising. LTDnetwork and EMI collaborated for this project based on a decision by Reuters in 1999 to offer news to consumers for free. Reuters made deals with companies like Yahoo! to offer news-related online ads.

"When I was chief technology counsel at Reuters, we were one of the first companies to make premium news content available online for free in an ad-supported transaction," Parks said. "When you look at the history of the music industry, the business model was that records were distributed and users paid to buy them. This is different because now a third party is entering the equation and essentially writing a check on behalf of the consumer to allow access to the product."

Related

According to the Interactive Advertising Bureau and PricewaterhouseCoopers, online advertising revenues were in the $3.9 billion range for Q1 2006.

"The music industry realizes consumers are not paying for music and are using pirate services," Klepsisz said. "But it shouldn't be necessary to pay to listen to everything. As long as the labels make money, it makes a lot of sense that advertisers would pay, rather than consumers."

Editor's Note:This story was updated on June 9 at 2:56 PM with additional comments by Klepsisz. The story has also been updated with the correct spelling of Klepsisz's name.